USD/JPY Weekly Forecast: The Fed buys time

• Risk-aversion, Treasury yields drive USD/JPY above 110.00 to the Thursday close.
• Powell says taper to begin this year, but it is not a rate hike.
• Dollar reverts below 110.00, consolidates within a narrow two-month old trading band.
• Japanese deflation continued in August trapping BOJ monetary policy.
• FXStreet Forecast Poll sees scant movement above 110.00.

The USD/JPY moved above 110.00 for the first time in two weeks on Wednesday as global risk-aversion from the returning covid pandemic, higher US Treasury yields and anticipation that the Federal Reserve might announce a bond program taper underpinned the dollar. 

Fed Chair Jerome Powell's much anticipated speech at the bank's annual Jackson Hole symposium on Friday disappointed rate hawks hoping for an immediate change in policy and dropped the dollar from its prior highs. Mr. Powell said that a taper is likely before the end of the year but that it should not be construed as a rate hike and that the economy still has much work to do.  

 The Fed's bond purchase program of $120 billion a month of Treasuries and mortgage-backed securities is the prime reason that US interest rates have been near historic lows for 18 months and more. Reducing those purchases will permit Treasury rates to rise but the Fed is determined to prevent a rapid increase and thus Chair Powell's assertion that the taper is not a rate increase. 

Treasury rates were largely unchanged after the speech with the 10-year and 2-year bonds down about 2 basis points each but both remained higher on the week. The dollar lost ground but not dramatically, shedding about 30 points versus the yen and 40 against the euro. Equites were buoyant with the Dow rising over 200 points in early trading. 

In Japan, 33 of the nation’s 47 prefectures are now under some type of emergency measures set to last until September 12. Tokyo has been under restriction since July 12 and cases of the Delta variant have continued to mount. Prime Minister Yoshihide Suga said he hopes to achieve a 60% vaccination rate sometime in September. About 40% of the population, mostly the elderly, are currently protected. 

Japanese economic data provided little help for the yen. Tokyo consumer prices for August were considerably weaker than expected in headline and core. Annual CPI has fallen for two months in a row, for five of the last six month and 10 of the last 12. This bodes poorly for national CPI, which will be reported on September 23, and makes the removal of the Bank of Japan’s (BOJ) monetary support nearly impossible. 

In the US, Durable Goods Orders held up in July despite the falling Retail Sales, suggesting that the collapse in Consumer Sentiment in August may not presage a general drop in consumption. 

Covid cases continued to climb in many states, though there are signs of a peaking in the first affected areas. Lockdowns and economic restrictions have not been instituted anywhere, though some states and locales have resorted to requiring masks in all public venues. 

The unfolding disaster of the US withdrawal from Kabul compounded the general unease on the international scene and the safe-haven status of the US dollar.

USD/JPY outlook

The USD/JPY has traded in a narrow 109.50 to 110.50 band since the first week of July with two attempts in August to break lower. The first failed at 109.00 and the second at 109.25. 

Technical analytics have provided good support with the major moving averages augmenting the congestion beneath from nearly two months of band trading. 

Fundamental factors are the main determinants for the week ahead and the bias is weakly higher

 Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium did not change the overall rate picture, though he achieved his main goals of preventing a Treasury sell-off while establishing a general time frame for the bond program taper. 

August Nonfarm Payrolls on September 3 are the main statistical event followed by the Institute for Supply Management's Purchasing Managers' Indexes on Wednesday and Friday. If the US economy continues to perform the dollar will slowly move higher even if the outlook for US interest rates remains unclear.

Japanese Industrial production for July will likely confirm the detrimental impact on the current covid wave on the economy. 

Japan statistics August 23–August 27

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US statistics August 23–August 27

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Japan statistics August 30–September 3

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US statistics August 30–September 3

 

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USD/JPY Technical outlook

Neutral observation marks the USD/JPY momentum indicators, not surprising with the pair sitting near the middle of its seven-week range. The MACD (Momentum Average Convergence Divergence) is a very weak buy and the Relative Strength Index is almost exactly divided. True Range momentum fell all week until a slight revival on Fridaay's rapid but limited decline.  None of these indicators evince a strong prediction. 

Moving averages reinforce both sides of the USD/JPY range.

The 50-moving average (MA) at 110.15 was crossed in both directions on Thursday and Friday and since both days closed below the line it forms the first line of moderate resistance above 110.00. The 21-day MA at 109.83 and the 100-day MA at 109.66 were traversed on Wednesday, and remain untouched since. They are the first two support lines beneath the market.  The 200-day MA at 107.66, is for the moment, superfluous. 

The nearly equal spacing of the support and resistance lines will determine the week ahead's action and absent developments on the fundamental front, traders can expect a typical late August slough in movement.  Friday's US NFP report may provide the dollar with a lift but with the Fed's ambivalent rate position already established is it unlikely to translate into substantial variation. 

Resistance: 110.15 (50-day MA), 110.30, 110.50, 110.70, 111.00

Support: 109.83 (21-day MA), 109.66 (100-day MA) 109.50, 109.25, 109.00, 108.75

FXStreet Forecast Poll

The FXStreet Forecast Poll  predicts that the USD/JPY will obtain 110.00, but it is an endorsement of inactivity not a bullish trend.